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Exchange Traded Funds (EFT) and Your 401k

By Toma Franklin, Staff Writer

ETF's (Exchange Traded Funds) are quickly becoming the next big thing in investments and are, just as quickly, appearing in more and more retirement plans. Several New York based investment firms are beginning to offer 401k plans solely based on ETFs, and more firms and companies are certain to follow. Many claim that ETF-based plans offer many advantages over traditional retirement plans, but others aren't so sure. This article can help you to decide for yourself.

Traditional 401k vs. ETF-Only Plans

401k's work like savings accounts-money is stored away for a rainy day (or in this case, retirement) and generally matched by employers by contributions, stock-options, or some combination of both. Problems can arise when employees do not receive adequate investment advice, and become stuck-invested in slow-performing mutual funds that hinder the growth of their retirement nest egg. This is according to proponents of ETF-based plans, who assert that since ETF's, like stocks (and unlike most mutual funds) change in value more than once a day, ETF investments are easy to manage.

Some companies offer lifestyle and lifecycle funds, designed to help employees invest their ETF funds at the risk level they feel comfortable with. Lifecycle and lifestyle funds are offered in many mutual fund plans as well, but these are not always as well-managed as many proposed ETF plans. "Because we use ETFs we can be more precise in allocations to various sectors," says Daniel Carlson, managing director of New York-based Proctor Investment Managers, "We can move in and out of sectors more quickly, gaining more flexibility from a management point of view."

Many companies, however, are hesitant to adopt ETF-only plans, despite the proposed advantages. Traditional 401k plans provide a sense of security and familiarity for employees, and plans that seek to change 401k options may be met with reservation by employees (and employers) who feel that their current plan is fine the way that it is. Not everyone from the plan provider side is completely sold by the ETF-only idea, either. "Our plan sponsors have expressed limited demand for ETFs in their plans," says Fidelity spokeswoman Erika Soto. "And with index funds priced at a level often below comparable ETFs, mutual funds are the better investment vehicle to those who want index returns. It's a matter of cost-effectiveness."

ETF-Only 401k Plans: Know Your Options

If your company has or will be implementing an ETF-only 401k plan, it is in your best interest to obtain the full details about the new plan, and how it will impact your financial and investment future. Your personal financial planner can help you to become more informed about the ins and outs of your specific plan at your next appointment.